(Bloomberg) -- For index behemoth FTSE Russell, the likes of Apple Inc. are still too big for comfort -- even after the recent $2 trillion selloff that's dethroned Big Tech from the stock market's leaderboard.
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After equity trading wraps up on Friday, shares of the iPhone maker and five other technology giants will see their weightings shrink, with the benchmark provider pushing ahead with plans to curb the group's influence in key US growth and value gauges.
Together, the reduction is poised to prompt almost $6 billion of share selling from index-tracking funds following the Russell 1000 Growth gauge (ticker RLG), according to an analysis by JPMorgan Chase & Co. analysts Min Moon and Vivek Shah.
While the projected outflow is modest, the sheer fact that the technology megacaps are still getting their wings clipped underscores their extreme outperformance for more than a decade. At the peak in July, the cohort comprised 54% of RLG. Now, even after their market slump, the group still makes up half of the index.
Russell is the latest index overlord compelled to adapt to the modern investing era, where megacap stocks have reigned like never before. The lopsided market has created headaches for many fund managers, whose ownership in the largest companies is pushing against regulatory limits.
"Russell changes keep the index investable in periods of high concentration," said Carole Okigbo, global head of ETF capital markets at Vanguard Group, whose RLG-tracking fund (VONG) is one of the largest in the industry. "Ultimately, this is good for investors."
The capping rule also serves as a reminder that index investing is not as passive as believed, something that can have make-or-break consequences for stock pickers seeking to beat their benchmarks. Due to regulatory restrictions, some funds have been forced to go underweight the tech giants relative to an uncapped benchmark -- only to find themselves getting punished when stocks such as Apple and Nvidia Corp. keep getting bigger.
"Ultimately you're making a call that these stocks are not going to continue to appreciate in the same way. So rather than saying it, you're building an index that forces it to happen," said Alicia Levine, head of investment strategy and equities at BNY Wealth. "Large-cap funds who've underperformed for the last few 15 years can start to outperform."